African Eagle: a tale of two companies

Since African Eagle (LON:AFE) indicated last autumn its intention to spin out its non-core Zambian copper division into a separate business in order to focus on its nickel discovery in Tanzania, the firm’s shares have more than doubled their price: from 4.7 pence each on 23 September 2010 to today’s level of around 10 pence.

Investors are taking a keen interest in African Eagle’s spinout plans, especially after the firm put further meat on the bones of these plans with news that the Zambian copper business could IPO as early as October this year.

In our latest catch-up with African Eagle, Chris Davies, designate CEO of the proposed new company, confirmed that the IPO would be “either in the second half of 2011 or early next year” and would take place either on London’s Alternative Investment Market, where African Eagle itself resides, or on the Toronto Stock Exchange.

But first, African Eagle is seeking private equity funding that can be put into the company in order to move ahead with exploration and add value ahead of the IPO.

“We’ve taken our time over this because we wanted to look at the whole package of assets,” says Davies. “But we also want to kick-start exploration as soon as we can.”

And Davies says that African Eagle has already made a great deal of progress in raising private capital for its Zambian division.  “We’re in advanced negotiation now with some very interested parties,” he says.

The idea behind the splitting of African Eagle is to enable the core business to focus on its potentially world-class nickel deposit at Dutwa in Tanzania, and make the transition from explorer to nickel producer.

After an upgrade last year the total Dutwa resource is now estimated to contain 98.6 million tons of 0.93 per cent nickel and 0.03 per cent cobalt as measured by JORC (the code for reporting exploration results, mineral resources and ore reserves as developed by the Australasian Joint Ore Reserves Committee).

This suggests that there are approximately 917,000 tons of nickel at Dutwa. So, it is no surprise that its chairman, Euan Worthington, believes there is a “wide gap between our market capitalisation and the underlying value of our assets”.

Indeed, an independently-developed economic model commissioned by African Eagle shows a range of net present value (NPV) estimates of between US$260 million and US$870 million for the resource. (African Eagle’s market cap is less than £45 million at the time of writing).

This would be based upon the processing of three million tons of ore (through tank and/or heap leaching) annually – a realistic production target, according to African Eagle, although there is a possibility that throughput could be increased to five million tons per annum.

Davies confirms that a pre-feasibility study is on track for the third quarter of 2011, which should lead on to a bankable feasibility study.

A second drill rig is on its way to Dutwa, although delayed due to the flooding earlier this year in Queensland, Australia. But sampling has already begun with the first metallurgical sample, of around 11 tons, currently being tested in Perth.

Meanwhile, the company confirmed in April that its partner on the Dutwa project, Czech firm Safina, had agreed to finance its share of the pre-feasibility and bankable feasibility studies. On completion of the latter study African Eagle is expected to hold between 76 per cent and 80 per cent of the project, with Safina holding the remainder.

As far as the forthcoming IPO of its copper division is concerned, African Eagle believes it has been fully justified in holding off on spinning out its copper portfolio in Zambia as the price of copper has continued to reach new records.

“We seem to be in some kind of supercycle at the moment and I’m led to believe that it will continue,” says Davies pointing out the strong demand for copper in growing economies like China.

As well as being tasked with raising private equity financing for the business ahead of its IPO, Davies is also implementing an accelerated work programme.

As well as its Mkushi Copper Mine joint venture, being developed with Ratel Group, the Zambian business’s assets include two key exploration projects, Mokambo and Ndola, which are located on the Zambian Copperbelt.

Located 60 kilometres north of Ndola – and only 12 kilometres from Glencore’s large Mopani/Mufulira mine where production is being ramped up to 870,00 tons of copper concentrate per year – Mokambo has not yet been explored systematically, says Davies.

But he adds that initial work on the prospect so far shows “ore grade drill intercepts of up to 3.5 per cent copper”.

At Ndola there are multiple targets earmarked for drilling at Misindu, Ndola East and Ndola South.

African Eagle has already drilled at Misindu, where Davies plans to drill the rest of a geochemical soil anomaly where just one deep hole found 20 metres at 0.75 per cent copper at shallow depth.

At Ndola East, African Eagle has so far modelled historic data from deep holes that were drilled in the 1960s and where previous explorers hit low-grade copper mineralisation.

According to Davies, Ndola East could host around 100 million tons of sulphide ore that grades at perhaps 0.9 per cent copper.

There is also the chance of finding copper oxide ore at the prospect in the up-dip portion of the sulphide ore, which has yet to be tested..

Meanwhile, at Ndola South three ‘copper in soil’ targets have been identified, although this area is understood to have a more complicated structure than the rest of Ndola.

At Mkushi an initial start up operation, using heap leaching or alternative processing methods, is scheduled to begin later this year. Ratel is updating a feasibility study from 2008 with the aim of building up a larger-scale operation in the latter part of next year.

Funding for African Eagle’s interest in Mkushi will come from the copper division, in order not to deflect resources away from Dutwa.

Elsewhere, African Eagle announced in mid-April that it had executed a farm-in agreement with BrightStart Resources over the company’s Miyabi Gold Project in Tanzania in line with African Eagle’s plans to farm out and spin out its non-core assets.

BrightStar is to spend US$3 million over 30 months in order to earn 50% of the asset, with a minimum expenditure of US$1 million to occur during the first year of the agreement. Current JORC Resources at Miyabi are 12.4 million tons at 1.3 grams of gold per ton (520,000 ounces).

With African Eagle’s collection of assets and (from the point of view of its directors) lowly market cap, investors should keep a close eye on the company as it progresses the feasibility study on Dutwa and delivers on its strategy of  divesting itself of all but its core nickel assets.

Broker Seymour Pierce recently set a price target of 20 pence for the shares, which represents a premium of 100 per cent on their current level.